One-offs, decline in US drag Q4 performance…
Q4FY20 revenues declined 12.7% YoY to | 3845.7 crore (I-direct estimate: | 3715 crore) mainly due to Kyowa divestment and due to 9.3% YoY decline in US revenues to | 1579.1 crore (I-direct estimate: | 1483 crore). Domestic formulations grew 13.3% YoY to | 1192.1 crore (I-direct estimate: | 1137 crore). EBITDA margins contracted 614 bps YoY to 13.7% (I-direct estimate: 13.2%) due to lower gross margins and higher employee cost. EBITDA de-grew 39.8% YoY to | 526.3 crore (I-direct estimate: | 489 crore). Exceptional items include profit on Kyowa Pharma divestment of | 121 crore, loss on Kyowa Criticare divestment of | 28.4 crore and intangible impairment of | 9.6 crore. Adjusted net profit was at | 335.6 crore, up 16.4% YoY vs. | 288.4 crore in Q4FY19.
cGMP issues, pricing headwinds in US to the fore
Lupin’s US business (~36% of revenues) has been one of the largest ANDA pipelines comprising 430 filed ANDAs and 158 pending approvals including 43 FTFs. However, this segment is facing headwinds due to persisting pricing pressure and recent warning letters (Goa, Indore) and OAI at Gavis plant. The company is looking for branded products and complex generics (biosimilars, injectables) to overcome this issue. We expect sales from the US to grow ~11% to | 7148 crore in FY20-22E due to incremental market share in Levothyroxine (thyroid) and ProAir (respiratory) launch in H2FY21.
Indian formulations growth steady
Lupin ranks sixth in domestic formulations with a market share of 3.8%. The acute: chronic/ sub chronic ratio for the company is at 27:73. In terms of MR productivity, at ~| 88 lakh per MR, it has one of the best MR productivity among large cap peers. Also, tie-ups with Eli Lilly, Boehringer for anti-diabetics and with MSD for pneumonia vaccines are some steps to bolster the domestic franchise. We expect India sales to grow at a CAGR of ~11.0% in FY20-22E to | 6354 crore.
Valuation & Outlook
A key positive in FY20 is the substantial improvement of b/s post Kyowa divestment. On the P&L front, Q4 was impacted by Kyowa divestment and gRanexa decline in US. Margins were also disappointing mainly due to a change in product mix and higher employee cost. As per the management, FY21 US sales would be largely driven by gLevothyroxine, gProAir and 15+ new launches. Domestic branded formulations are expected to remain stable. However, the resolution of warning letter and clearance of official action indicated (OAIs) status on plants could be a near term overhang along with progress on the margins front. Like other pharma majors, Lupin has also chalked out product and cost rationalisation drive. The result of this drive could be visible two to three years down the line. We arrive at our target price of | 930 based on 24x FY22E EPS of | 38.7.
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